It's Time to Nibble on the Chewy Pullback

As pet adoption reached new levels in 2020 so too did pet retailer Chewy (NYSE:CHWY). A growing need to care for our pandemic puppies and COVID kittens led to some terrific results for Chewy and its shareholders.

But after soaring more than 200% last year, Chewy stock has taken a "paws" in 2021. Concerns about valuation and a post-pandemic hangover effect have caused many investors to head for the doggie door.

As the country's leading online pet prescriptions and products retailer gets set to report first quarter results, momentum is once again building. With the stock still a 50% rally away from its record high, investors have a chance to claw back in at a reasonable price.

 Why Did Chewy Stock Go Down?

From intraday bottom to top Chewy went from $20.62 to $120 over the 12-month stretch through February 2021. In the process, analysts' earnings estimates for fiscal 2021 went from a loss of roughly $0.20 to a gain of $0.20. EPS projections for fiscal 2022 were also sharply revised and currently sit at $0.49.

Yet with the company still on the brink of turning profitable, it became a target for the recalibration of growth stock valuations. Amid rising concerns over inflation and the resulting impact on growth stock valuations, Chewy shed almost half of its market value during the recent four-month slide.

Adding fuel to the downturn was Argos Holdings $500 million insider sell on April 14^th. The New York-based investment firm is one of Chewy's largest shareholders with more than 17.5 million shares.

From a technical analysis perspective though, the trading volume on the downside of the mountain was relatively benign. Absent a major spike or broad selloff, most shareholders appear to have been riding out the storm. This is good news for support levels on the way back up.

What are Chewy's Growth Prospects?

Last year Chewy recorded $7.15 billion in sales, a 47% increase from fiscal 2019. Although the bottom line was still in the red, the net margin improved almost 400 basis points to a negative 1.3%.

To turn in another strong performance this year, Chewy will need to continue to add to a customer base that swelled 43% last year. For this to happen pet ownership trends must be supportive. According to the American Veterinary Medical Association (AVMA), as many as two-thirds of U.S. households own at least one pet. Although pet adoption rates are likely to slow as people start spending less time at home, the U.S. pet products market is forecast to grow 5% annually over the next five years.

The most intriguing growth opportunity for Chewy is the emerging field of animal telehealth. Introduced in October 2020, the Chewy telehealth service has witnessed tremendous growth and is now available in 47 states. The telehealth platform along with online chat support for shoppers are making Chewy a popular choice with the digital consumer.

A few weeks back, the company announced the expansion of its "Connect with a Vet" telehealth platform. The main enhancement is the launch of video consultation feature that lets customers have more personalized interactions with veterinarian offices. Long in the background of human Zoom calls, dogs and cats are finally getting their day in the sun. Whether they stay attentive or wander off during the consultation is an unknown, but the service is likely to gain traction with convenience-minded pet owners. The other additions include prescheduled appointments as well as extended and weekend hours.

 Is Chewy Stock a Buy?

In each of its last three quarterly reports, Chewy has trounced the Street's earnings forecasts. In response, the stock has gone on some nice runs. In today's first-quarter report, the market will be looking for a $0.02 per share loss on revenue of $2.1 billion. There's a good chance profitability arrives sooner than expected and a fourth straight earnings beat prompts a sizeable gap up.

Although the consensus Q1 earnings forecast is once again conservative, analysts' price targets are far from cautious. Within the last few days, four sell-side firms have called Chewy stock a 'buy' with targets ranging from $105 to $125. At the midpoint, that's almost 50% upside from current levels.

With Chewy on the brink of profitability, a strong quarter could catch the attention of investors who prefer to focus on profitable businesses only. It could therefore mark an inflection point in the trading volume and price performance of the stock.

Under $80 is an attractive entry or add-on point for the top pure play in the growing pet e-commerce space. A bright outlook from management and some barking on social media could send this stock back to $100 in no time.